Mahmud Mir
The annual meetings of the International Monetary Fund (IMF) and the World Bank are set to begin in just one day. During this event, held in Thailand from October 12 to 18, Bangladesh will present its stance regarding its own reform initiatives and a potential new loan program.
Preliminary discussions are underway for a loan package worth $4.5 billion under this program. The proposed new program would span three years, with a formal agreement potentially being finalized this coming December.
A delegation led by Finance Minister Amir Khasru Mahmud Chowdhury will attend the seven-day annual meeting in Bangkok, Thailand, starting tomorrow, Monday. Detailed discussions regarding the next loan facility will be held with IMF representatives there.
Meanwhile, the government has announced the cancellation of the ongoing loan program with the IMF, rejecting the agency’s stringent and irrelevant conditions.
Finance and Planning Minister Amir Khasru Mahmud Chowdhury has articulated a historic goal of moving forward through self-financing by strengthening the domestic economy and engaging with international capital markets.
This policy decision to reduce reliance on foreign donor agencies in favor of self-reliant financing has sparked widespread discussion within the country’s economic landscape.
Speaking at a recent event, the Finance Minister stated, “The previous IMF program was cancelled to avoid reliance on loans burdened with harsh conditions. We will not accept a new loan if it entails such stringent terms.”
However, during discussions regarding the proposed $4–4.5 billion, three-year loan program, the agency expressed concerns over shortcomings in revenue sector reforms, the new pay structure, and the massive expenditure on subsidies.
They perceive a lack of long-term structural changes in the plan proposed by the National Board of Revenue (NBR), viewing it as focusing solely on revenue growth for the current fiscal year.
Economists and analysts observe that a country’s macroeconomy experiences multifaceted short- and long-term impacts—whether it chooses to comply with or reject the conditions set by international agencies.
Implementing those conditions would have placed severe strain on the domestic economy; similarly, if the agreement were to be cancelled, significant new challenges could arise regarding the stability of the external sector.
According to reports, to secure a fresh, substantial loan from the IMF, Bangladesh may need to demonstrate progress in four key areas: increasing revenue collection, reforming the banking sector, reducing and rationalizing subsidies, and restoring macroeconomic stability. The organization is likely to seek visible progress in all these areas.
This process also encompasses the disbursement of the sixth tranche of the ongoing loan program. An IMF delegation is scheduled to arrive in Dhaka on October 29. During their approximately two-week visit, they will review the overall state of Bangladesh’s economy and assess the progress made in fulfilling the conditions attached to the previous five tranches.
Prior to this, the IMF and World Bank annual meetings are set to take place in Thailand from October 12 to 18. Bangladesh is preparing to advance discussions regarding a new loan program during these meetings.
Economists believe that implementing the various structural conditions imposed by the IMF could have triggered severe social and inflation-related crises within the country’s economy:
Had the subsidies worth thousands of crores of taka on electricity, fuel oil, and gas been withdrawn all at once—as per IMF conditions—electricity prices would have surged by 25 to 30 percent. Raising the overall VAT rate to a uniform 15 percent would have risked pushing food inflation—currently hovering between 9.5 and 10 percent—beyond the 15 percent mark.
Increased fuel costs and the withdrawal of tax exemptions would have raised production costs in export-oriented sectors, including the garment industry, by 7 to 10 percent. Consequently, compared to Vietnam or India, Bangladesh would have lost 4 to 6 percent in per-unit competitiveness, risking a $3 to $5 billion drop in its $45 billion export earnings—a decline that would have jeopardized the jobs of 300,000 to 500,000 workers.
Meanwhile, the condition to make interest rates fully market-driven has already pushed bank lending rates to between 14 and 16 percent. Under a tight monetary policy, there was a risk that industrial loan interest rates would exceed 18 percent; this could have dragged private sector credit growth—already down to 9.5 percent—further to 5–6 percent, thereby severely dampening new investment.
There was a mandate to mobilize an additional Tk 1.10 lakh crore in revenue to raise the NBR’s tax-to-GDP ratio from 7.4 percent to 8.5 percent. Had indirect taxes (VAT and customs duties) been increased without curbing direct tax evasion, 20 to 25 percent of the income of lower and lower-middle-class households would have been consumed by these additional taxes and the rising costs of essential commodities.
Dr. Zahid Hussain, former lead economist at the World Bank’s Dhaka office, noted that even though the government has taken a stance contrary to IMF conditions, it would be difficult for the administration to forgo the agency’s loan given the current financial situation.
He stated that the IMF’s primary condition is reform; they will not provide funding without it. However, the government’s budget documents indicate that no major reforms will be undertaken in the first two years. Instead, measures aimed at public appeasement—such as ‘family cards,’ salary hikes for government officials, and an expansive Annual Development Program (ADP)—have been adopted.
The IMF has reservations about these measures as well. Nevertheless, Dr. Hussain noted that it would be positive for the country if the government could align the IMF with the reforms it has initiated based on domestic realities.
He pointed out that previous loan programs failed to progress due to delays in implementing various reforms, such as those in the banking and revenue sectors and subsidy reductions. The IMF will likely call for similar reforms this time around; their stance remains unchanged. Domestic experts have also advocated for prioritizing these same types of reforms. Reforms must be undertaken.
He noted a lack of continuity in previous tax system reforms. Although there were initiatives to reduce various tax rates and move towards a uniform rate, no steps were taken to unify the VAT rate. The IMF might also raise questions regarding the discussion to revert the classification timeframe for non-performing loans (NPLs) from 90 days back to 180 days.
He further added that regardless of whether an IMF program is in place, Bangladesh must implement the necessary reforms itself. The banking sector needs to be rectified, the issue of non-performing loans addressed, and banking management and supervision strengthened. Public expenditure management must become more efficient and accountable, and the revenue collection system needs to be made more effective.
Policies regarding energy and other subsidies must be designed so that they neither place undue pressure on the public nor impose an unbearable burden on the revenue system. These reforms are not merely for the sake of the IMF; they must be carried out in Bangladesh’s own economic interest.
Leaders of business organizations (such as FBCCI and BGMEA) believe that the manufacturing sector has been spared for the time being, as the alarming prospect of sudden hikes in electricity and fuel prices has been averted. However, without a government roadmap to recover non-performing loans, ensure good governance in the banking sector, and resolve the dollar crisis, international agencies might downgrade the country’s credit rating.
When asked about this, Md. Taskin Ahmed, President of the Dhaka Chamber of Commerce & Industry (DCCI)—one of the major business organizations—stated that the business community views the government’s cautious and considered stance regarding the IMF loan positively. He remarked that if the conditions attached to the loan drive up costs related to industry, investment, employment, and business operations, their potential negative impacts must certainly be taken into account.
At the same time, issues concerning foreign currency reserves, external transactions, and international confidence remain crucial. Therefore, the issue is not merely about whether or not to take a loan; the primary consideration should be which decision would be most effective for the country’s economic interests.
Economists argue that boosting domestic revenue is far more effective than adopting restrictive policies based on artificial conditions. If the tax-to-GDP ratio can be raised to 10 percent (up from the current 7.4 percent) through digitalization and the curbing of tax evasion, there would be no need to rely on the IMF’s annual installments of $400–$500 million.
To cover the current account deficit of $500 million to $1 billion—resulting from the non-receipt of the outstanding $1.86 billion—the government plans to raise capital through the bond market, Sukuk bonds, and international capital markets. Furthermore, if annual remittances can be increased to $30 billion by curbing informal channels (*hundi*), Bangladesh will be able to shed its foreign dependency and move towards a fully self-reliant economy.
